All posts tagged Credit Crisis

Marilyn Monroe cuts a cake commemorating the first anniversary of CinemaScope, back in 1954.

Over at Capital Economics they’re spotlighting Aug. 9, 2007 as the “the unofficial onset of the global credit crunch” making tomorrow the fifth anniversary of, well, the beginning of the end of the uber-loose financial conditions that begat the U.S. housing boom, bust, financial crisis, bailout-a-palooza, deep recession and — if you believe Reinhart and Rogoff — the economic sluggishness we’re still contending with.

Of course, it’s a little bit squishy declaring any one moment the “start” of something. Some would argue that the birth of the securitization market way back in the 1980s might have been the true start of what eventually became the U.S. housing morass. Still, it’s instructive to remember what was going on in early August 2007, which was when the cracks in the foundation of global finance really started to get noticeable and the themes that have come to define the market for the last half-decade started to emerge.

Here’s a quick jaunt down memory lane, culled from various sources.

Bank losses tied to subprime started to pile up: “The troubles demonstrated both the global reach of the crisis and its impact on a widening circle of markets and companies. The first jolt came from French bank BNP Paribas, which said early in the day that it was freezing three investment funds once worth a combined $2.17 billion because of losses related to U.S. housing loans.” (WSJ)

Let the bank bailouts begin!: “Five years ago, a little-known bank that lent to small and midsize German companies decided it wanted to broaden its business. An affiliate of the bank started buying complex bonds invented in the U.S. The strategy brought a sharply higher industry profile for IKB Deutsche Industriebank. Moody’s Investors Service endorsed its move, crediting the bank last year with ‘successfully diversifying.’ Today, IKB is on the receiving end of a bailout, organized over a weekend of emergency meetings by Germany’s financial regulator, with contributions from major German banks. (WSJ)

Banks started losing trust in each other: “On Aug. 9, 2007, the three-month dollar rate surged to 40 basis points more than the overnight index swap rate, a measure of what traders expect the federal funds rate to average. It had averaged 11 basis points, or 0.11 of a percentage point, between December 2001 and July 2007.” (Bloomberg)

Central banks jumped into action: “Until the past few days, most monetary policy makers were emphasizing their concerns about mounting inflation pressures rather than problems emanating from the troubles of the U.S. subprime-mortgage market. But that may be changing.” (WSJ)

You can almost imagine this one starting off with “I have a ‘friend’…”

Spanish Prime Minister Mariano Rajoy made a very interesting statement to journalists today at the parliament. He said the European Union needs to provide more support for the bloc’s struggling nations. Here’s the money quote:

Austerity yes, and growth, too, but I would also like to see a clear, forceful message of support for the euro and for the sustainability of the debt of all the countries where that is currently in doubt.

The countries where that is currently in doubt? He wouldn’t, couldn’t be talking about Spain now, could he? Nah, ‘course not. Couldn’t be. Could it? Is this Spain’s way of admitting it has a problem, using the old “I have a friend…” line?

The Spanish PM isn’t the only one talking in code. ECB President Mario Draghi today said “our strong preference is that Greece will continue to stay in the euro area,” but he said the bank remained focused on its anti-inflation mandate, and “preserving the integrity of our balance sheet.” In other words, we’re not going to break our backs to keep Greece in the euro.

Funding pressures for European banks were significantly eased by emergency central-bank measures late last year, but there are now some troubling signs the pressures are returning.

Notably, the one-year EUR/USD basis swap, a measure of the cost paid by banks for swapping euros into dollars, widened Monday to an intraday high of negative 60.75, its widest level in 2012. That is nearly a 52% jump in the cost of obtaining dollars via this means since March 27. It narrowed Tuesday, closing at negative 56.00 Tuesday, which admittedly is a far cry from its widest margin of negative 114.00 in November, but the pace of widening in the past three weeks is raising eyebrows.

European banks have access to euro funding but often are limited in their ability to fund their U.S. asset books in dollars. So they borrow euros and then swap floating rate debt for U.S. dollar floating-rate debt to get access to the U.S. currency. The cost of doing so is measured by the basis swap.

A widening of the swap could mean a few things: an indication that dollars are scarce, that other banks are reluctant to lend to their European counterparties, or that the EUR1 trillion ($1.31 trillion) pool of three-year euro loans the ECB injected into the banking system in December and February is drying up. The diminishing effect from the ECB’s two long-term refinancing operations, or LTROs, is relevant to this measure of dollar funding because if euros are harder to come by it will also be more expensive for banks to deploy euros in dollar swaps.

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A rout in raw materials has helped drive down holdings in a Carlye Group firm’s flagship fund from about $2 billion to less than $50 million. The collapsing commodities market is spreading pain well beyond specialists to some of the heaviest hitters on Wall Street.